FOREX-Yen slumps as BOJ stands pat, extends loan scheme

TOKYO, Feb 18 (Reuters) - The yen dropped against its major counterparts on Tuesday, after the Bank of Japan held policy steady as expected and extended a special lending program to support the economy.

The BOJ maintained its upbeat economic assessment, suggesting no further easing steps are on the near-term horizon.

The central bank also decided to extend three special loan facilities by one year from their scheduled expiry at end March. The extension was also expected, though some market participants apparently viewed it as a policy signal of a more accommodative stance.

“People just saw the news about the loans and jumped on the bandwagon to buy back dollar/yen and cover their shorts after its drop to session lows after the BOJ held steady,” said a director at a foreign exchange market research firm in Tokyo.

The dollar rose about 0.6 percent to 102.58 yen, after dipping as low as 101.76 yen in the immediate wake of the BOJ’s announcement. It pulled further away from a nearly two-week low of 101.37 yen hit in the previous session.

The euro also added about 0.7 percent on the day to 140.69 yen.

Against a basket of currencies, the dollar retook some lost ground and steadied on the day. The dollar index fell as low as 79.951 in the previous session, its lowest since late last year, before ticking up to 80.156.

U.S. markets were closed on Monday for the Presidents Day holiday.

Market participants will be waiting to see if Governor Haruhiko Kuroda maintains the stance he took last month — that no further easing was needed now with prices rising steadily and overseas economies recovering — or if he hints at any more steps following disappointing growth data this week.

Kuroda will hold an embargoed news conference from 3:30 p.m. (0630 GMT) with his comments expected to come out any time after 4:15 p.m. (0715 GMT).

Gross domestic product data released on Monday showed the Japanese economy grew less than expected in the fourth quarter as consumer spending, business investment and exports disappointed, a worrying sign of waning momentum ahead of April’s planned increase in the national sales tax.

The Australian dollar was up about 0.3 percent at $0.9061 , after rising to a one-month high of $0.9079.

In minutes released on Tuesday of the Reserve Bank of Australia’ Feb. 4 meeting, when the RBA surprised some by dropping its bias to ease further, the central bank noted that a lower exchange rate would support growth.

The RBA said it saw signs policy stimulus was working to spur economic activity and as a result it was prudent to keep interest rates steady for a while.

The euro was up about 0.1 percent on the day at $1.3715 , not far from a high of $1.3723 touched on Monday, its highest level since Jan. 24.

European Central Bank governing council member Ewald Nowotny said on Monday that a negative deposit rate from the ECB may fail to stimulate more lending and could have an adverse psychological effect.

The single currency was also helped by data on Friday showing both Germany and France grew slightly faster than expected in the fourth quarter.